Record — AUME momentum and a sharper focus

Record (LSE: REC)

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Research: Financials

Record — AUME momentum and a sharper focus

Record’s Q424 trading update demonstrated continued growth in assets under management equivalent (AUME), which will support management fee growth into FY25. In FY24, AUME grew 17% to US$102.2bn, setting a new milestone in business scale. Net inflows for FY24 were US$6.8bn (FY23: US$9.1bn) or 8% of opening AUME. Performance fees of £5.8m matched the record FY23 figure, and we expect this to offset the negative product mix in FY24. We have reduced our FY24e EPS by 1%, which is affected by £2.4m in IT restructuring and impairment charges announced in March 2024. New CEO Dr Jan Witte is putting a sharper focus on the business, and we have upgraded our FY25e EPS by 5% in anticipation of efficiency improvements after a period of elevated cost inflation.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Financials

Record

AUME momentum and a sharper focus

Trading update

Financial services

16 May 2024

Price

65p

Market cap

£129m

£/US$1.265

Net cash (£m) at 30 September 2023

14.0

Shares in issue

199.1m

Free float

37.3%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.2

(7.7)

(25.3)

Rel (local)

(1.7)

(16.6)

(31.1)

52-week high/low

98p

58p

Business description

Record is a specialist independent asset, currency and derivatives manager. It provides a number of products and services for institutional clients, including passive and dynamic hedging, and a range of currency for return strategies, including funds and customised segregated accounts.

Next events

Full-year results

28 June 2024

Analyst

Rob Murphy

+44 (0)20 3077 5700

Record is a research client of Edison Investment Research Limited

Record’s Q424 trading update demonstrated continued growth in assets under management equivalent (AUME), which will support management fee growth into FY25. In FY24, AUME grew 17% to US$102.2bn, setting a new milestone in business scale. Net inflows for FY24 were US$6.8bn (FY23: US$9.1bn) or 8% of opening AUME. Performance fees of £5.8m matched the record FY23 figure, and we expect this to offset the negative product mix in FY24. We have reduced our FY24e EPS by 1%, which is affected by £2.4m in IT restructuring and impairment charges announced in March 2024. New CEO Dr Jan Witte is putting a sharper focus on the business, and we have upgraded our FY25e EPS by 5% in anticipation of efficiency improvements after a period of elevated cost inflation.

Year end

Revenue (£m)

PBT
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/22

35.2

10.9

4.37

3.60

14.9

5.5

03/23

44.7

14.6

5.81

4.50

11.2

6.9

03/24e

45.4

12.8

4.91

4.51

13.2

6.9

03/25e

44.9

14.8

5.74

4.75

11.3

7.3

Note: *EPS is diluted. **DPS excludes special dividends.

AUME surpasses the US$100bn milestone

Record’s AUME has reached a new milestone of US$102.2bn in FY24, 78% above the US$57.3bn recorded just five years ago. This growth is the result of the company building deeper relationships with existing clients, widening its product capability and adding new clients. The higher AUME forms a base for management fees in FY25, which have been affected by a negative mix shift in FY24. The core strategy of building out higher-margin asset management products remains at an early stage, but we note US$0.3bn of related inflows in FY24 and expect to hear more from the new CEO at the full-year results in June.

Efficiency improvements expected in FY25

Record has experienced double-digit underlying cost inflation (ie excluding variable compensation) in both FY23 and FY24. In the Q4 statement Dr Witte highlighted the ongoing review of group expenditure, and we have reduced our cost estimate by 9% in FY25. Taking into account the weaker revenue-mix base from FY24, this leads to a 5% increase in our FY25e EPS, to 5.74p, with our FY24 estimate down 1% to 4.91p.

Valuation: Premium valuation versus peers

Record trades at premiums of 10% and 16% to its peers on calendarised P/E and EV/EBITDA multiples, respectively. We believe this reflects the superior net AUME inflow performance compared to a mixed sector in which some companies have had material persistent outflows of AUM. The dividend yield is competitive with its peer group.

AUME momentum

Net inflows drive performance over time

Record has achieved impressive growth in the business over the last six years. AUME has increased by 78% to $102.2bn in FY24, a compound average growth rate (CAGR) of 12% (Exhibit 1), driven by net inflows into AUME. Exhibit 2 shows that net new money has averaged 6.0% of opening balances of AUME, more than double the market and other effects at 2.7%.

Exhibit 1: AUME development

US$bn

FY19

FY20

FY21

FY22

FY23

FY24

FY25e

CAGR FY19–24

Dynamic hedging

3.1

2.5

9.3

10.6

14.7

16.5

17.2

40%

Passive hedging

48.2

50.3

61.5

62.8

63.8

76.4

78.0

10%

Currency for return

2.7

2.6

3.9

5.0

3.9

5.5

6.0

15%

Multi-product

3.0

3.0

5.2

4.5

5.2

3.4

4.4

3%

Cash and futures

0.3

0.2

0.2

0.2

0.1

0.4

0.4

6%

Total AUME

57.3

58.6

80.1

83.1

87.7

102.2

106.0

12%

Source: Record reports, Edison Investment Research

The net inflows have come from deepening relationships with existing clients as well as from new clients, and the strategy of diversifying into higher-margin products has paid off. Exhibit 1 shows that dynamic hedging and currency for return products have attained CAGRs of 40% and 15%, respectively, for instance, and these products have revenue margins 5–7x that of passive hedging.

Exhibit 2: Components of growth in AUME

FY19

FY20

FY21

FY22

FY23

FY24

FY25e

Average FY19–24

Net new money

(4.5)

4.6

9.7

2.4

9.1

6.8

2.8

% opening AUME

-7.2%

8.0%

16.6%

3.0%

11.0%

7.8%

2.7%

6.0%

Market, FX, etc

(0.4)

(3.3)

11.8

0.6

(4.5)

7.7

1.0

% opening AUME

-0.6%

-5.8%

20.1%

0.7%

-5.4%

8.8%

1.0%

2.7%

Source: Record reports, Edison Investment Research

Exhibit 3 illustrates the growth in average AUME and the associated average fee rate. The drop in the average fee rate in FY24e and FY25e is explained by the mix effect of one large high-margin client shifting from a currency for return strategy into a passive strategy about halfway through FY24. This affects both years, with roughly half in FY24e and the full annualised impact in FY25e, but results in a higher margin than in FY21 and earlier. Record’s strategy is to increase the management fee revenue margin over time, as it grows higher value-added products including in asset management.

In spite of the decline in fee rate and resulting low management fee growth in FY24e, we expect average management fees to accelerate into FY25 due to strong average AUME growth (Exhibit 4).

Exhibit 3: Average AUME and average management fee rate

Source: Record reports, Edison Investment Research

Exhibit 4: Management fee momentum into FY25e (£m)

Source: Record reports, Edison Investment Research

New CEO brings a sharper focus

As CEO elect, Dr Witte announced the IT platform and team restructuring in March 2024 prior to his official appointment on 1 April 2024. The discontinuation of development of the ‘R-platform’ (a new technology platform) using external consultants will incur an exceptional impairment charge to capitalised costs of £1.9m. IT development will be in house and Record has restructured the IT team, including appointing senior personnel with the relevant expertise..

Dr Witte highlighted a sharpened focus across the business in the Q4 statement including ‘resource allocation’ and we have factored a 3.3% decline in underlying operating expenses (ie excluding variable compensation) into our forecasts. This restores the operating margin to 32% in FY25e, roughly in line with FY23 and moving towards Record’s mid-30s ambition. Our FY25 EPS forecast increases accordingly by 5% (Exhibit 5).

Record will announce more detail on the company’s strategy at the full-year results on 28 June.

Financials: 5% upgrade to FY25e EPS

Full-year results will be announced on 28 June, however we have incorporated information from the Q324 and Q424 trading updates into our forecasts.

Our FY24 EPS estimate is broadly unchanged, as better-than-expected performance fees of £3.3m in H224 have offset negative mix effects in management fees, as well as £2.4m in impairment and restructuring charges related to the technology platform and team restructuring.

Performance fees are inherently unpredictable, and we had previously modelled in £2.5m for FY24e. According to the latest trading update, management expects FY24 performance fees of £5.8m, maintaining the previous year’s record level. We believe we are conservative in maintaining our £1.5m performance fee projection for FY25, which is roughly half the five-year average of £2.8m (Exhibit 4).

As discussed above Record had also indicated a negative mix shift in the Q3 update, with one large client moving $4bn from a multi-product strategy to a passive strategy, which has affected our management fee estimates by a negative 3% in FY24e and a negative 5% in FY25e, reflecting the full annualised effect partially offset by growth in AUME.

We have reduced our previous administrative expense forecast for FY25 by 9% to reflect the restructuring actions in IT and a focus on efficiency across the business following a period of high cost inflation.

Our overall estimate changes are summarised in Exhibit 5. FY24e EPS falls by 1% on a higher tax rate and FY25e EPS rises by 5% as expense reductions more than offset a lower revenue forecast.

Exhibit 5: Estimate revisions

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

Old

New

% chg

Old

New

% chg

Old

New

% chg

Old

New

% chg

03/24e

43.4

45.4

5%

12.8

12.8

0.3%

4.96

4.91

-1%

4.55

4.51

-1%

03/25e

47.1

44.9

-5%

14.1

14.8

5.2%

5.46

5.74

5%

4.70

4.75

1%

Source: Record, Edison Investment Research. Note: EPS is diluted. Dividend excludes any special payment.

Valuation

Although Record has a different kind of business to most asset managers, we compare its valuation with its peers in Exhibit 6. Record trades at premiums of 10% and 16% to its peers on calendarised P/E and EV/EBITDA multiples, respectively. We believe this reflects Record’s net AUME inflow performance compared to a mixed sector in which some companies have had material persistent outflows of AUM. The dividend yield is competitive with the peer group at 6.8%.

Exhibit 6: Peer group multiples

Price
(p)

Market cap
(£m)

P/E 2024e
(x)

EV/EBITDA
2024e (x)

Dividend yield
(%)

Ashmore

199.2

1,420

16.4

8.9

8.5

City of London Investment Group

4.4

221

N/A

N/A

9.6

Impax Asset Management

482.0

639

14.2

8.8

5.7

Jupiter

84.9

463

8.5

0.7

8.1

Liontrust

716.0

465

9.8

5.2

10.1

Man Group

257.6

3,868

7.9

6.1

3.3

Polar Capital

550.0

557

13.4

6.8

8.4

Schroders

373.0

6,013

11.5

8.2

5.8

Average

1,706

11.7

6.4

7.4

Record

66.0

131

12.9

7.4

6.8

Source: LSEG, Edison Investment Research. Note: Prices as 10 May 2024.

Exhibit 7: Financial summary

Year end 31 March (£'000s)

 

 

2019

2020

2021

2022

2023

2024e

2025e

 

 

 

 

 

 

 

 

 

 

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

Revenue

 

 

24,973

25,563

25,412

35,152

44,689

45,374

44,869

Operating expenses

 

 

(17,089)

(17,996)

(19,333)

(23,945)

(29,925)

(30,280)

(30,365)

Other income/(expense)

 

 

(8)

82

41

(372)

(293)

(2,550)

(150)

Operating profit (before amort. and except.)

 

 

7,876

7,649

6,120

10,835

14,471

12,543

14,354

Finance income

 

 

113

88

33

21

127

300

472

Profit before tax

 

 

7,989

7,737

6,153

10,856

14,598

12,843

14,826

Taxation

(1,559)

(1,365)

(802)

(2,225)

(3,259)

(3,339)

(3,707)

Minority interests

 

 

0

48

0

0

0

0

0

Attributable profit

 

 

6,430

6,420

5,351

8,631

11,339

9,504

11,120

Revenue/AuME (excl. perf fees) bps

 

 

4.9

4.9

4.8

5.6

5.6

5.4

5.2

Operating margin (%)

 

 

31.5

29.9

24.1

30.8

32.4

27.6

32.0

Average number of diluted shares outstanding (m)

 

 

198.1

197.1

196.2

197.3

195.3

193.6

193.6

Basic EPS (p)

 

 

3.27

3.26

2.75

4.52

5.95

4.98

5.83

EPS - diluted (p)

 

 

3.25

3.26

2.73

4.37

5.81

4.91

5.74

Dividend per share (p)

 

 

2.30

2.30

2.30

3.60

4.50

4.51

4.75

Special dividend per share (p)

 

 

0.69

0.41

0.45

0.92

0.68

0.00

0.40

Total dividend (p)

 

 

2.99

2.71

2.75

4.52

5.18

4.51

5.15

BALANCE SHEET

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

2,161

4,868

5,153

6,084

7,813

7,564

7,944

Intangible Assets

 

 

288

470

420

562

1,390

1,950

2,600

Tangible Assets

 

 

761

751

683

401

377

267

287

Investments

 

 

1,112

2,472

3,046

3,447

4,901

4,448

4,448

Other

 

 

0

1,175

1,004

1,674

1,145

899

609

Current assets

 

 

31,427

31,149

28,045

27,141

28,924

28,719

29,858

Debtors

 

 

7,562

8,704

8,006

9,883

14,373

14,583

13,919

Cash

 

 

12,966

14,294

6,847

3,345

9,948

14,136

15,939

Money market instruments

 

 

10,735

7,958

12,932

13,913

4,549

0

0

Other

 

 

164

193

260

0

54

0

0

Current liabilities

 

 

(6,158)

(6,955)

(5,992)

(6,210)

(7,630)

(6,603)

(6,079)

Creditors

 

 

(2,736)

(3,009)

(3,426)

(4,721)

(6,011)

(5,153)

(4,919)

Financial liabilities

 

 

(2,621)

(2,191)

(1,696)

0

0

0

0

Other

 

 

(801)

(1,755)

(870)

(1,489)

(1,619)

(1,450)

(1,160)

Non-current liabilities

 

 

(29)

(901)

(407)

(1,085)

(816)

(673)

(673)

Net assets

 

 

27,401

28,161

26,799

25,930

28,291

29,007

31,050

Minority interests

 

 

60

132

0

0

0

0

0

Net assets attributable to ordinary shareholders

 

27,341

28,029

26,799

25,930

28,291

29,007

31,050

No of shares at year end

 

 

199.1

199.1

199.1

199.1

199.1

199.1

199.1

NAV per share (p)

 

 

13.7

14.1

13.5

13.0

14.2

14.6

15.6

CASH FLOW

 

 

 

 

 

 

 

 

 

Operating cash flow

 

 

7,026

6,543

6,798

11,355

12,263

10,303

12,347

Capex

 

 

(72)

(243)

(230)

(75)

(272)

(120)

(250)

Cash flow from other investing activities

 

 

(561)

1,513

(6,210)

(3,392)

7,498

4,818

(328)

Dividends

 

 

(5,517)

(5,888)

(5,290)

(6,512)

(9,095)

(10,258)

(9,176)

Other financing activities

 

 

(613)

(943)

(2,368)

(5,019)

(3,942)

(553)

(790)

Other

 

 

205

346

(147)

141

151

(2)

0

Net cash flow

 

 

468

1,328

(7,447)

(3,502)

6,603

4,188

1,802

Opening cash/(net debt)

 

 

12,498

12,966

14,294

6,847

3,345

9,948

14,136

Closing net (debt)/cash

 

 

12,966

14,294

6,847

3,345

9,948

14,136

15,939

Closing net (debt)/cash inc money market instruments

23,701

22,252

19,779

17,258

14,497

14,136

15,939

AUME ($bn)

 

 

 

 

 

 

 

 

 

Opening

 

 

62.2

57.3

58.6

80.1

83.1

87.7

102.2

Net new money flows

 

 

(4.5)

4.6

9.7

2.4

9.1

6.8

2.8

Market/other

 

 

(0.4)

(3.3)

11.8

0.6

(4.5)

7.7

1.1

Closing

 

 

57.3

58.6

80.1

83.1

87.7

102.2

106.1

Source: Record accounts, Edison Investment Research


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This report has been commissioned by Record and prepared and issued by Edison, in consideration of a fee payable by Record. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by Record and prepared and issued by Edison, in consideration of a fee payable by Record. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Research: Healthcare

Actinogen Medical — Funding in place through key catalysts

Actinogen announced a capital increase of up to A$8.9m on 3 May, consisting of a A$5.0m (gross) placement along with a shareholder rights offering (‘entitlement offer’) designed to raise up to A$3.9m (gross) from existing shareholders. The closing date of the rights offer is 29 May and, given that Actinogen shares are currently trading at c A$0.028, we assume full exercise of the rights offering in Q424 (Q2 CY24). The company expects that the proceeds (assuming full exercise of the rights offering) will extend its operating runway beyond the interim results release of the first 100 patients of the XanaMIA Phase IIb study in cognitive impairment (CI) in patients with mild-to-moderate Alzheimer’s disease (AD), expected in mid-CY25. These results and the results from the XanaCIDD Phase IIa study in patients with CI associated with major depressive disorder (MDD), expected in early Q3 CY24, represent major potential value inflection points, and Actinogen is now funded past these two key catalysts. Our risk-adjusted net present value (rNPV) is A$544m (vs A$528m previously).

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